1) Muhammad Faisal Shaikh, Muhammad Zeeshan, and Muhammad Afaaq presented on Mudarabah and Musharkah as modes of financing. 2) Mudarabah is a partnership where one party provides capital to another to invest, and profits are shared according to a predetermined ratio while losses are borne solely by the capital provider. 3) Musharkah is similar but both parties also share losses proportional to their capital contribution, and both may participate in management. 4) These structures can be used for project financing, import/export financing, and working capital needs when structured appropriately to comply with Islamic finance principles.

1. P R E S E N T E R S
M U H A M M A D F A I S A L S H A I K H
M U H A M M A D Z E E S H A N
M U H A M M A D A F A Q
MUDARBAH & MUSHARKAH
AS A MODE OF FINANCING

2. MUDARABAH

3. What is Mudarabah?
 Kind of partnership
 One person gives money to another for investing
 Investor ------> Rab-bul-Maal Or Mudarabi
 Fund Utilizer -------> Mudarib
 Rabbul Maal---------> No Right in Management

4. Mudarabah v/s Musharakah
1. Investment
2. Participation in Management
3. Loss Share
 In Partnership
 Rabbul Maal
 Mudarib
4. Liability
5. Appreciation in the value of the assets

5. Types of Mudarabah
 Al Muqayyadah ( Restricted Mudarabah)
 Al Mutlaqah ( Un-Restricted Mudarabah)

6. Profit Distribution in Mudarbah
At the Beginning :
 Definite Profit Ratio agreed by Mutual Consent
 No Particular Proportion has been prescribed by the
Shariah
 May agree on different ratio of Profit 40 % Mubarib,
60% Rabbul Maal or viseversa
Lump sum Amount of Profit Not Allowed:
Capital ---------------> Rs. 100,000
Profit ----------------> Rs. 10,000 of the Mudarib
Profit 2 --------------> 20 % of Capital of Rabbul Maal

7. Profit Distribution in Mudarbah
 Loss in Some Transactions and others in Profit
Offset the Loss First
Remainder Distributed

8. Termination of Mudarabah
 Can be terminated at any time
 Give Notice to other Party
Asset in form of Cash ---------> Distribute according
to the agreed Ratio
Asset in other Form ------------> Mudarib may sell it
liquidate them , Distribute it

9. Combination of
Musharakah & Mudarabah
 In Mudarabah, Fund Provider -----> Rabbul Maal
 Mudarib add Capital, if agreed with Mudarabi
Combination:
Rabbul Maal -------------------> Rs. 100,000
Mudarib Add Own -------------> Rs. 50,ooo
Profit Distribution Mudarabi:
 Certain Percentage of Profit as Mubarib
 Another Percentage of Profit as Sharik

10. MUDARBAH & MUSHARKAH
AS A MODE OF FINANCING

11. PROJECT FINANCING

12. PROJECT FINANCING
 “Financer want to finance whole project”
 Mudarabah & Musharakah both easily adopted
Musharakah:
 Investment comes from both sides
 Management both responsibility
Combination:
 Management responsibility of one party
 Investment comes from both

13. PROJECT FINANCING
Withdraw One Party from Musharakah
 Other party want to continue
 Purchase the shares.
Financial Institution
 Don’t want remain partner forever
 Sale of share as one unit is lack of liquidity
 Financer divide into smaller unit and may sell it

14. SECURITIZATION OF
MUSHARAKAH

15. SECURITIZATION OF MUSHARAKAH
 Big Project , Huge Amount Required
 Limited No. of people cannot afford to finance
Musharakah Certificate:
 Each certificate represent his proportion of
ownership in the asset of musharakah.
 Negotiable Instruments
 Buy or Sale in Secondary Market

16. SECURITIZATION OF MUSHARAKAH
NOT ALLOWED Certificate Trading other than Par Value
 Assets are in Liquid Form
 Cash , Receivables or Advances due
Example:
No. of Share -------------------------> 100 Shares
Value of Share ------------------------> 01 Million
Total Worth of Project --------------> Rs. 100 Million
 Nothing Purchased by this Money
 Not Allowed Sale other than Par Value
 Money Exchange with Money, excess side ----------> Riba

17. SECURITIZATION OF MUSHARAKAH
Example:
Musharkah Project
Non - Liquid Assets ----------> 40%
Liquid Assets -----------> 60 %
Face Value of Share ------------> Rs. 100
If Sold Higher Price
Sold Price -------------------> Rs. 110
It Represents:
Liquid Assets ------------------> Rs. 60
Non – Liquid Assets ----------> Rs. 50 ( Previous was Rs. 40 )

18. SECURITIZATION OF MUSHARAKAH
 Sold Less than Rs. 60 Not Allowed
 Rs. 60 Liquid Assets ( Cash , Receivables etc)
 Money Exchange with Money,
 Low / High side ----> Riba

19. Financing of a single Transaction

20. Financing of a single Transaction
 Mudarabah & Musharakah both may be Used
Import Financing :
 Letter of Credit( L/C )
without Any Margin ---------> Mudarabah
With Some Margin ------------> Combination
Expiry of Term
 Imported good are not sold
 Importer may himself purchase the share of Financer
 Pre-Agreed Price or Market Price

21. Financing of a single Transaction
Export Financing :
 Exported has a specific order from abroad
 Export goods Price is known
 Easily Calculate Expected Profit
Finance on the basis of Mudarabah & Musharakah
Pre-Agreed Ratio of Profit on Export Bill
In Order to Secure Financer Himself , Put Condition:
 Export goods with Full Conformity, will be responsibility of exporter
 If Some Disturbance found, exporter will be responsible only
( Mudarabah )
 If Some Disturbance found other than Negligence, All Partners bear the
Loss ( Musharakah )

22. SHARING GROSS PROFIT ONLY

23. SHARING GROSS PROFIT ONLY
 Financing on the basis of Musharakah
Problem:
 Difficult to valuate All Assets & Depreciation /
Appreciation Cost
Solution 1 :
 Pay Agreed Rent to Client of All fixed assets
(Machinery , Building ) from Musharakah fund
 Remain distribute , according to agreed Ratio

24. SHARING GROSS PROFIT ONLY
Solution 2 :
 Gross Profit will be distributed
 Higher Profit Ratio of Client
 Gross Profit Means Only Direct Expenses will be
deducted from the Sales ( Material, Labor, Electricity
)

25. RUNNING MUSHARKAH ACCOUNT
ON THE BASIS OF DAILY
PRODUCTS

26. RUNNING MUSHARKAH ACCOUNT
Musharakah:
 Opening Running A/c
 Deposit & Withdraw Amount any time
 Profit on Average Balance
Musharakah Rulings:
 % for Management
 % for Investor
 Loss , same as investment proportion
 Average Balance per day --------------> Profit

27. RUNNING MUSHARKAH
ACCOUNT
Argument:
Why share Profit when other Party, during a period had no Money
invested in the Business ?
Example :
A & B Agreed ----------------> Musharakah
Each Contribute --------------> Rs. 50,000
When A didn’t invest his money into Join Pool
Earn Profit --------------> Rs. 10,000 on Rs. 50,000
Distribute --------------> Agreed Ratio
Musharakah Contract Made:
 Subsequent Transaction effected
 Regardless, Whose Money Utilized

28. WORKING CAPITAL FINANCE

29. WORKING CAPITAL FINANCE
Musharakah:
 Contribute in Cash or Non-liquid
 Value of Business Assets ---------> Working partner
Profit :
 On the Basis of Value of Business
 Exceed Profit of working Partner ( 70% 30%)
Termination or Expiry:
 Purchase share of Financer

30. OBJECTIONS ON MUSHARAKAH
FINANCING

31. Risk of Loss:
Argument:
“Musharakah is more likely to pass on losses of the
business to the bank . This loss will be passed on to
depositors “
Answer:
 Study the feasibility
 If Business is not profitable, Refuse it
 Diversified Musharakah Portfolio

32. DISHONESTY
 Argument:
 not paying any return to the financiers
 Claim that it has suffered a loss
Solution:
1. well designed system of auditing
2. Profit on the basis of gross margins only
3. Punitive Step: Unable to avail any facility from the
Bank.

33. Secrecy of the Business:
 it may disclose the secrets of the business to the
financier,
Solution
 may put a condition that the financier will not
interfere with the
 management affairs, and he will not disclose any
information about the business to any
 person without prior permission of the client.

34. Client’s Unwillingness to Share Profits:
 clients are not willing to share with the banks the actual
profits of their business.
 passed on to the tax authorities and Clients’ tax
liability increases.
Solution:
clients need to be convinced and persuaded that borrowing
on interest is a cardinal sin,
The governments should also try to appreciate the fact that
if
rates of taxation are reasonable and if tax-payers are
convinced that they will benefit

35. THANK YOU